11 march 2015 mobile embrace (mbe) · pdf file11 march 2015 mobile embrace (mbe) ... - mbe...

11 March 2015

Mobile Embrace (MBE) Outperform

Initiation of Coverage – “Embracing the mobile revolution” $0.16

Marcus Hamilton [email protected] +61 2 9210 1319

Summary

Market Capitalisation $62.3m

Share Price $0.16

52 week low $0.13

52 week high $0.30

Ave Monthly Vol (year rolling) 61.9m

Key Financials (A$ million)

Year End FY14 Act.

FY15 Est.

FY16 Est.

Revenue ($m) 19.2 30.7 41.0

EBITDA ($m) 3.0 4.8 8.9

NPAT ($m) 2.5 4.2 6.6

EPS (c) 0.8 1.1 1.7

EPS Growth (%) 411% 44% 54%

PE (x) 21.2x 14.7x 9.5x

DPS (c) 0 0 0

Div Yield na na na

EV ($M) 50.1 50.1 50.1

EV/EBITDA (x) 16.9x 10.5x 5.6x

ROE 14.8% 20.0% 23.6%

EBITDA Margin 15.4% 15.5% 21.8%

Payout Ratio na na na

Share Price Graph (A$)

Our View Mobile Embrace (MBE) is a mobile payments and mobile marketing company delivering solutions to businesses and consumers predominately in the Australian market. The company has exhibited rapid growth over the past two years and we forecast EPS growth of 44% in FY15 and 54% in FY16 as increasing scale in both divisions drives improved operating leverage and strong margin expansion. MBE trades on 15.1x FY15 and 9.8x FY16 earnings, a discount of 13% and 38% to small industrial peers, boasts a strong Balance Sheet (net cash $10.4m) and is well positioned capitalise on a rapidly growing mobile market. Accordingly, we initiate with an Outperform rating.

Exposure to mobile advertising. MBE offers direct exposure to the increasing structural shift towards mobile devices, which is driving rapid growth in both mobile internet usage and the mobile advertising market. The global mobile advertising market more than doubled in CY14 to $237m and is forecast to grow at a CAGR of 39% between 2013 and 2018, significantly outperforming other advertising markets. MBE’s mobile marketing division has effectively capitalised on this shift in its early stages, growing revenues by >60% per annum over the past two years, and is strategically positioned to benefit from the increasing prominence of mobile devices as an advertising medium. We forecast divisional EBITDA of $1.3m (+1744%) in FY15 and $2.8m (+110%), and see upside risk to our near term estimates. Highly scalable model. Both of MBE’s business units are highly scalable and we expect continued top line growth to drive a considerable uplift in group earnings in the coming periods. We forecast group revenue of $30.7m in FY15 (+60%) and $40.9m in FY16 (+34%). As both divisions continue to build scale, we see the benefits of improved operating leverage driving group EBITDA margin expansion from 15.5% in FY15 to 21.8% in FY16.

Attractive Valuation Metrics. MBE trades on 15.1x our FY15 EPS forecast, discounting growth of 44%, falling to 9.8x in FY16 on growth of 54%. On an EV/EBITDA basis, MBE trades on 10.5x and 5.6x our FY15 and FY16 estimates, and offers an attractive free cash flow yield of 4% and 8% across the 2 years. We note that the ASX Small Industrials Index currently trades on forward earnings multiples of 16.9x FY15 and 15.5x FY16, on median growth expectations of 124% and 9%. As such, MBE trades at a discount of c13% and c38% to small industrial peers over the next two years. We believe such a discount is excessive given MBE’s 1) robust near term growth profile; 2) scalable business model; 3) exposure to the rapidly growing mobile advertising market (5 year CAGR 39%) and 4) strong Balance Sheet.

0

2

4

6

8

10

12

14

16

18

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

Vo

lum

e (m

illio

n)

12 Months

Mobile Embrace Limited of 20

Taylor Collison Limited 11 March 2015

Company Overview Mobile Embrace (MBE) is a company focused on delivering mobile payment and mobile marketing solutions to businesses and consumers predominately in the Australian market. The company’s operations are split in to two key functions;

1) Mobile Payments – operating under the “Convey” brand, MBE generates revenues by providing a platform for consumers to buy various products and services on their mobile devices, via direct carrier telco billing or other third party solutions. This division is broadly split in to three sub categories, namely;

a. Trading Desk – mobile media buying, with real time performance managing customer acquisition using targeted mobile media buying across multiple advertising networks;

b. Customer Management Platform – development and integration of mobile optimised products and services, tracking and managing customer lifetime value; and

c. mobipay – m-Payments platform.

2) Mobile Marketing – operating under the “4

th Screen” brand, MBE generates revenues through

advertising agencies and brands enabling them to engage with consumers on their mobile devices. Similarly, mobile marketing operates under three broad categories;

a. Mobile Premium Advertising Network – extensive network of premium publishers and

sales representation of the publishers’ respective mobile advertising inventory;

b. Mobile Marketing Toolkit – tools for development and management of mobile marketing and advertising campaigns.

c. Mobile Media Production and Publishing – mobile advertising, rich media, HTML 5

development etc.

An overview of the group’s operating divisions as explained above is detailed in Figure 1 below.

Figure 1 - MBE Organisational Overview

Source: Company reports



1) Investment Highlights Exposure to mobile shift & rapidly growing mobile advertising market

- MBE offers direct exposure to the increasing structural shift towards mobile devices, which is driving

rapid growth in both mobile internet usage and the mobile advertising market. Empirical evidence (Internet Trends) indicates that smartphones still only account for c30% of total mobile users worldwide, notwithstanding rapid growth in penetration levels over the past 4 years. This relatively low level of penetration, coupled with the increasing momentum of penetration, is one of the key factors underpinning robust near term growth in the mobile advertising market. To this end, the global mobile advertising market more than doubled in CY14 to $237m (IAB) and Frost and Sullivan estimate that the market is forecast to grow at a CAGR of 39% between 2013 and 2018, significantly outperforming other advertising markets.

Operating leverage - Strong earnings growth profile

- Both of MBE’s business units are highly scalable and we expect continued top line growth to drive a considerable uplift in group earnings in the coming periods. Based on our divisional earnings assumptions detailed below, we forecast group revenue of $30.7m in FY15 (+60%) and $40.9m in FY16 (+34%). As both divisions continue to build scale, we see the benefits of improved operating leverage driving group EBITDA margin expansion from 15.5% in FY15 to 21.8% in FY16. As a result, we forecast EBITDA of $4.8m in FY15 and $8.9m in FY16, implying growth of 61% and 88% respectively.

Competitive advantage and barriers to entry

- MBE’s integrated mobile payments platform and extensive premium mobile advertising network have both required a significant amount of time and capital investment to establish, which we believe presents a notable barrier to entry to potential new market entrants. Within mobile payments specifically, we note that the establishment of direct carrier billing arrangements with large telcos can be a costly and timely process. Similarly, MBE has spent over 4 years developing relationships with advertising agencies and premium publishers to create its premium mobile advertising network. These elements, together with the technical expertise and capital required to develop the platforms underpinning each service offering, gives MBE a considerable advantage over new market entrants.

Attractive valuation metrics

- MBE trades on 15.1x our FY15 EPS forecast, discounting growth of 44%, falling to 9.8x in FY16 on growth of 54%. On an EV/EBITDA basis, MBE trades on 10.5x and 5.6x our FY15 and FY16 estimates, and offers an attractive free cash flow yield of 4% and 8% across the 2 years. We note that the ASX Small Industrials Index currently trades on forward earnings multiples of 16.9x FY15 and 15.5x FY16, on median growth expectations of 124% and 9%. As such, MBE trades at a discount of c13% and c38% to small industrial peers over the next two years. We believe such a discount is excessive given MBE’s 1) robust near term growth profile; 2) scalable business model; 3) exposure to the rapidly growing mobile advertising market (5 year CAGR 39%) and 4) strong Balance Sheet.

Strong Balance Sheet

- MBE boasts a strong balance sheet, with $10.4m in cash and no debt at the end of 1H15, following a $11.4m capital raising in March 2014. We believe that this strong cash position will be bolstered in the coming periods by increasing operating cash flows and provide MBE with considerable flexibility to pursue additional growth opportunities and/or commence the payment of dividends in the near term.



2) Investment Risks Increased competition

- The industries in which MBE operates – both mobile payments and, to a lesser extent, mobile advertising - are both highly competitive and MBE is likely to face increasing pricing pressure in its key offerings and/or lose market share as a result of existing providers or new entrants seeking to grow their own payments/advertising businesses. The anticipated rapid growth in both of these markets will naturally attract an increasing number of new providers and cause traditional advertising/payment companies to consider diversifying in to these growth areas. As a result, the intensifying levels of competition in MBE’s key markets is likely to lead to margin erosion across all of MBE’s product and service offerings over the medium term.

Reliance on direct carrier billing

- MBE’s mobile payments division is largely dependent upon securing and maintaining a number of direct carrier billing arrangements with major telecommunications companies, whose telco subscribers form a large portion of MBE’s customer base. There exists a risk that the agreements MBE currently has in place will not be renewed upon on terms commercially acceptable to MBE, which would likely have a material adverse impact on the profitability of MBE’s mobile payments division. The company mitigates this by adding new telco partnerships and territories therefore reducing the risk and reliance on just one market or telco. Examples of this are the launch and now operation of overseas territories with Singtel, Swisscom and the UK telcos.

International expansion

- MBE has recently started expanding its operations in to a number of international markets to fuel growth. Market dynamics vary considerably across different jurisdictions as a result of differing consumer behaviour, macroeconomic environments, competitive landscapes and regulatory considerations, amongst other things. There is a risk that MBE will not be able to replicate the success of its domestic operations as a result of failing to appreciate the differing dynamics of the international markets it enters, although results in FY15 are showing international revenues are building.

Technological advancements

- MBE’s core value proposition lies in the functionality and flexibility of its software platforms and associated product offerings. The industry in which MBE operates is highly competitive and is subject to the introduction of new and improved products and services into the market on a regular basis. As such, MBE is at risk of losing its competitive appeal if it does not adequately invest in product development and enhancing its capabilities.

Reliance on Key Management

- The responsibility of overseeing the day-to-day operations and strategic management of MBE is substantially dependent upon its senior management and its key personnel. There can be no assurance given that there will be no detrimental impact on MBE if one, or a number of, these employees leave the company.



Mobile payments – the value chain explained The end-to-end nature of MBE’s mobile payments platform is depicted visually in Figure 2 below. As can be seen, in simple terms, MBE buys media content through its media trading desk and optimises it with various engagement tools, develops and integrates the final product for placement, while also providing the mobile payment platform itself.

Figure 2: MBE Mobile Payments Value Chain


It is important to note that MBE is not a mobile wallet payment system that is linked to a financial instrument (credit card and/or bank account) that is reliant on mass market adoption to succeed. Rather, the company’s key offering is an agnostic payment gateway which integrates payment systems that typically deliver attractive conversion rates.

Revenue model MBE’s core customer base is consumers paying for digital products and services using their mobile device. Revenue is derived by charging subscription payments on a per-transaction basis. Key revenue drivers for mobile payments, therefore, include the number of payment transactions and the Average Revenue per Transaction. We estimate that the average number of monthly transactions facilitated through MBE’s platform increased from circa 240,000 per month in FY13 to circa 360,000 in FY14. This growth was driven largely by an increased number of direct carrier billing agreements with large telcos (ie Telstra, Optus, Vodafone), which allows customers of these companies to buy products seamlessly through MBE’s platform and have the payment included as part of their normal telco bill.



Figure 3: MBE Subscriber Base


While the revenue per transaction varies considerably across MBE’s product suite, we estimate that Average Revenue Per Transaction (or ARPT) is relatively steady at ~$3.30 per transaction. We note that this amount represents an overall charge for all of the services MBE provides as part of a typical transaction, such as use of the mobile media trading desk and sourcing of mobile products, and is not just a charge for using the mobile payments platform in isolation. In 2H CY14, MBE took a disciplined approach to lower the average transaction value in an effort to boost overall Customer Lifetime Value (CLV). As anticipated, the reduced APRT resulted in a mild reduction in revenue from Q3 to Q4 and increased the time to breakeven on marketing spend. This adverse short term impact was, however, offset by increased customer lifetime and overall CLV, which supports greater medium term earnings certainty.

Figure 4: Mobile payments revenues Figure 5: Average customer lifetime value

Source: Company presentation Source: Company presentation



Historical Earnings Performance – Mobile Payments MBE’s mobile payments division has delivered strong growth in recent times, with revenues increasing by 55% in FY14 to $14.3m and 1H15 revenue growing by 22% to $8.9m. Divisional NPBT margins have typically trended around 33% over FY13 and FY14, however investment in growth initiatives to the tune of $3.37m during 1H15 saw this reduce to c21% and result in a lower divisional NPBT relative to 1H14. Given the company changed its segmental reporting at the 1H14 result, we have only included the historical reports from 1H13 onwards which are reported under the new standard.

Figure 6: Mobile Payments – Historical Earnings Results

Source: : Company reports

Earnings forecasts – Mobile Payments Our forward earnings estimates for MBE’s mobile payments division are underpinned by the following key assumptions;

- The number of average monthly transactions increases by 32% in FY15, and a further 30% in FY16 driven by;

o Continued strong growth in MBE’s domestic m-payments customer base (+24% in 1H15),

supported by increased marketing spend;

o Increasing penetration of international markets, particularly in the UK, Singapore and Swiss markets where MBE is gaining positive early traction;

o Additional direct carrier billing arrangements further expanding MBE’s addressable market;

- Average revenue per transaction remains constant at c$3.30;

- Divisional costs remain largely fixed following a c$3m increase in attributable overheads in 1H15 as result of increased headcount and sales/marketing spend to drive growth;

- On this basis, we expect divisional NPBT margins to average 24% across FY15 and trend back to historical levels of >30% as the business continues to build scale on a relatively fixed cost base;

FY12 1H13 2H13 FY13 1H14 2H14 FY14 1H15

MPAY

Number of weekly transactions 60,950 53,459 63,816 60,000 90,000 86,985 90,000 112,299

na na na -1.6% 68.4% 36.3% 50.0% 24.8%

Number of monthly transactions 243,800 213,835 255,266 240,000 360,000 347,941 360,000 449,197

Growth 0.0% na na -1.6% 68.4% 36.3% 50.0% 24.8%

Average Transaction Value 3.25 3.25 3.25 3.25 3.35 3.300 3.30 3.30

Revenue 9.53563 4.17444 5.00051 9.17495 7.272 6.982 14.254 8.894

Growth (%) 0 na na (3.8%) 74.2% 39.6% 55.4% 22.3%

Segment NPBT na 1.43 1.5691 3.0 2.432 2.432 4.9 1.858

Growth (%) na na na na 70.1% 55.0% 62.2% (23.6%)

Margin na 34% 32% 33% 33% 35% 34% 21%



Putting this altogether, we forecast revenue of $19.4m in FY15 and $25.2m in FY16, implying growth of 36% and 30% respectively. We forecast divisional EBITDA of $4.7m in FY15, which represents a c3% fall on FY14 and reflects the increased cost base of this division following the investment in growth made during 1H15. Given that we do not expect any further material increases to the divisional cost base in the near term, we forecast divisional EBITDA of $7.5m in FY16 as margins improve to 30%, which implies growth of 60% on the prior corresponding period and highlights the significant operating leverage of the mobile payments business.

Figure 7: Mobile Payments – Earnings forecasts

Source: : Company reports

FY12 FY13 FY14 FY15 FY16

MPAY

Number of weekly transactions 60,950 60,000 90,000 122,500 159,250

Growth (%) na -1.6% 50.0% 9.1% 30.0%

Number of monthly transactions 243,800 240,000 360,000 490,000 637,000

Growth 0.0% -1.6% 50.0% 36.1% 30.0%

Average Transaction Value 3.25 3.25 3.30 3.30 3.30

Revenue 9.53563 9.17495 14.254 19.404 25.225

Growth (%) 0 (3.8%) 55.4% 36.1% 30.0%

Segment NPBT na 3.0 4.9 4.694 7.505

Growth (%) na na 62.2% (3.5%) 59.9%

Margin na 33% 34% 24% 30%



Mobile Marketing – the value chain explained MBE’s mobile marketing division operates under the brand name of “4

th Screen” and, in broad terms, assists

advertising agencies and brands in engaging with consumers on their mobile devices. As noted above, mobile marketing operates under three broad categories;

a. Mobile Premium Advertising Network – extensive network of premium publishers and sales

representation of the publishers’ respective mobile advertising inventory;

b. Mobile Marketing Toolkit – tools for development and management of mobile marketing and advertising campaigns.

c. Mobile Media Production and Publishing – mobile advertising, rich media, HTML 5 development etc.

In providing these services, the company’s core value proposition is two-fold;

- Delivering higher returns for premium publishers for their advertising inventory; and

- Driving higher return on investment for advertising agencies and premium brands

Similar to the mobile payments division, this business unit provides a complete end-to-end mobile marketing solution to its customers, which is key point of differentiation for MBE relative to its peers, who typically only specialise in one aspect of the mobile marketing process. An overview of MBE’s fully-integrated solution is detailed in Figure 8 below.

Figure 8: MBE Mobile Marketing Value Chain


To put this in perspective, a typical transaction in the mobile marketing division will generally evolve as follows;

1) A premium brand (eg. Coke, McDonalds) will approach their advertising agency (eg. Mnet) with a plan to launch a mobile advertising campaign to market their products

2) The advertising agency will approach MBE and brief the company on its desired outcome from the campaign

3) MBE will then;

a. Source the relevant content to develop the campaign;



b. Determine the most appropriate forum/medium on which to publish the campaign through its extensive premium publisher network; and

c. Launch and manage the campaign for the agency.

4) Assuming that the end client’s budget for the particular campaign is $100k, the revenue split across the

different parties will typically be as follows;

a. $100k is paid by the end client to the advertising agency;

b. The advertising agency takes a fee of c10%;

c. The publisher (eg BBC Mobile, Gourmet Traveller) will take a fee around 50% of the remaining amount; and

d. MBE will be paid the balance.

MBE has one of the largest premium mobile advertising networks in Australia, and the continued growth in new, high end premium publishers on the network makes MBE an increasingly attractive partner for advertising agencies to use for their mobile advertising campaigns. This is reflected in the rapid growth in campaign volumes MBE has demonstrated since the division was created in 2011 and the fact that the company has now provided these services for over 200 Tier One brands.

Figure 9: Key Brand Clients Figure 10: Key Publishing Partners

Source: Company reports Source: Company reports

Mobile Marketing – Revenue Model MBE generates revenues in mobile marketing from charging its customers (predominately advertising agencies and brands) on a per-campaign basis for performing the above-mentioned services. Key revenues drivers for mobile advertising, therefore, include the number of campaigns and the average revenue per campaign. MBE provided services for 187 mobile advertising campaigns during 1H15, which represented volume growth of 76% on the prior corresponding period. Based on divisional 1H15 revenue of $5.18m, this implies an average campaign value of $29,090 for the period. While the value per individual campaign would vary considerably across different campaigns, we believe this is a reasonable estimate for average contract size for any given period.

Assuming that the average contract size remained constant at $29,090 over the past few years, we estimate that campaign volumes increased by 66% in FY13 to ~106 campaigns, and by 64% in FY14 to ~173 campaigns. However, the 1H14 divisional result suggests that circa 100 campaigns ran during the period at an average campaign value of $22,393 to produce revenues of $2.3m, which is circa 23% lower than 1H15.



As such, we note that the strong divisional revenue growth (as discussed below) has been driven by a combination of both;

1) An increasing number of mobile advertising campaigns being conducted by MBE, reflecting positive organic growth; and

2) Increasing average revenue per campaign, which is indicative of mobile advertising accounting for an increasing proportion of overall/total advertising spend of MBE’s client base.

Together, these factors point to the increasing prominence of mobile as an advertising medium and that MBE is effectively capitalising on the rapidly growing market. Additionally, while campaigns are typically short term in nature, ranging from one week to one month on average, we note that c70% of MBE’s advertising clients are repeat customers. In our view, this demonstrates a high level of customer satisfaction with MBE’s service offering and provides confidence in medium term earnings certainty.

Mobile Marketing – Positive market growth fundamentals Various industry based reports point to significant near term growth in the mobile advertising market and we note the rapid growth of Facebook’s mobile advertising revenue over recent years as one example of the emerging shift towards mobile devices (Figure 11). While the potential magnitude of this opportunity for MBE is unclear, we see the following factors as being supportive of our thesis here;

1) increasing smartphone penetration, which is driving significant growth in the addressable market for mobile advertising (discussed below); and

a. Empirical evidence (Internet Trends) indicates that smartphones still only account for c30% of total mobile users, notwithstanding rapid growth in penetration levels over the past 4 years (Figure 13).

b. This relatively low smartphone penetration, coupled with the increasing momentum of

penetration, gives us confidence in near term market growth estimates, and supports our positive investment thesis.

2) the perceived mismatch between the proportion of time spent in various media channels relative to

that channel’s share of advertising spend (Figure 12)

Figure 11: Facebook mobile advertising revenue Figure 12: Media advertising analysis

Source: Facebook Source: Facebook



Figure 13: Mobile Marketing – Historical Earnings Results

Source: Internet Trends

Historical Earnings Performance – Mobile Marketing MBE’s mobile marketing division has delivered strong consistent revenue growth over the past 2 years, with revenues increasing by 66% in FY13 to $3.1m and 63% in FY14 to $5.1m. As noted earlier, robust top-line growth has been driven by a combination of both increasing campaign volumes and rising average revenue per campaign, supported by rapid growth in the overall mobile advertising market. The company posted its maiden divisional NPBT in FY14 of $0.073m, which increased considerably to $0.508m in 1H15 as the business continues to build scale. Given the company’s changed its segmental reporting at the 1H14 result, we have only included the historical results from 1H13 onwards which are reported under the new standard.

Figure 14: Mobile Marketing – Historical Earnings Results


FY12 1H13 2H13 FY13 1H14 2H14 FY14 1H15

M-Adv

Number of campaigns 64 55 51 106 78 95 173 178

Growth (%) 0.0% na na 65.6% 41.7% 85.8% 62.9% 128.6%

Average campaign value($) 29,090 29,090 29,090 29,090 29,090 29,090 29,090 29,090

Increase in average contract size (%)

Total Revenue 1.861 1.598 1.483 3.081 2.265 2.754 5.019 5.178

Growth (%) na na na 65.6% 41.7% 85.8% 62.9% 128.6%

Segment NPBT na (0.219) 0.000 (0.219) (0.026) 0.099 0.073 0.508

Growth (%) na na na na na na na na

Margin na na na na na 3.6% 1.4% 9.8%



Earnings forecasts – Mobile Payments Our forward earnings estimates for MBE’s mobile marketing division are underpinned by the following key assumptions;

- The number of mobile advertising campaigns conducted by MBE increases by 30% in FY15, and a further 20% in FY16 driven by;

o Increasing campaign volumes from MBE’s existing client base, with continued high rates of customer retention (~70%) providing a high level of repeat business; and

o Growth in new clients stemming from increased marketing spend.

o We believe our assumptions here are conservative given that the overall mobile advertising market is forecast to grow at a CAGR of 39% between 2013 and 2018

- The average revenue per campaign increases by 5% in both FY15 and FY16 as mobile accounts for an

increasing proportion of total advertising spend in the market

o Similarly, we believe our assumptions are very conservative here given that;

MBE’s average campaign revenue has increased notably over the past 2 years; and

Increasing evidence of the emerging shift towards mobile devices (eg Facebook earnings).

We forecast divisional revenues of $11.3m in FY15 and $15.8m in FY16, representing growth of 125% and 40% respectively. We anticipate this will result in divisional EBITDA of $1.3m in FY15 and $2.8m in FY16, with margins improving from 12% to 18%.

Figure 15: Mobile Marketing – Earnings forecasts

Source: : Company reports, TC estimates

FY12 FY13 FY14 FY15 FY16

M-Adv

Number of campaigns 64 106 173 378 491

Growth (%) 0.0% 65.6% 62.9% 119.1% 30.0%

Average campaign value($) 29,090 29,090 29,090 30,544 32,072

Increase in average contract size (%) 5.0%

Total Revenue 1.861 3.081 5.019 11.287 15.760

Growth (%) na 65.6% 62.9% 124.9% 39.6%

Segment NPBT na (0.219) 0.073 1.342 2.813

Growth (%) na na na 1744.1% 109.7%

Margin na na 1.4% 11.9% 17.9%



Earnings forecasts – Group P+L

Figure 16: MBE Group P+L


Key points MBE delivered both revenue growth and margin improvement over the past two years, resulting in material increases in group EBITDA and NPAT over FY13 and FY14. Based on our divisional earnings assumptions detailed above, we forecast group revenue of $30.7m in FY15 (+60%) and $40.9m in FY16 (+34%). As both divisions continue to build scale, we see the benefits of improved operating leverage driving group EBITDA margin expansion from 15.5% in FY15 to 21.8% in FY16. As a result, we forecast EBITDA of $4.8m in FY15 and $8.9m in FY16, implying growth of 61% and 88% respectively. We envisage higher near term depreciation and amortisation charges as a result of the increased investment in platform development and international expansion in recent times, and expect the company to commence paying tax in FY16, albeit at a lower effective rate than the statutory 30%.

FY12 FY13 1H14 2H14 FY14 1H15 2H15 FY15 FY16

Revenue 11.396 12.228 9.538 9.643 19.181 14.072 16.619 30.691 40.985

Growth na 7.30% 65.37% 49.25% 56.85% 47.54% 72.34% 60.01% 33.54%

COGS (1.561) (2.342) (1.996) (3.423) (5.419) (2.390) (2.827) (5.217) (6.967)

Gross Profit 9.836 9.887 7.542 6.220 13.762 11.682 13.792 25.473 34.018

Gross Margin 86.3% 80.9% 79.1% 64.5% 71.7% 83.0% 83.0% 83.0%

EBITDA 0.323 0.802 1.755 1.200 2.955 1.731 3.04 4.767 8.923

EBITDA Margin 2.8% 6.6% 18.4% 12.4% 15.4% 12.3% 18.3% 15.5% 21.8%

D&A (0.668) (0.441) (0.181) (0.292) (0.473) (0.464) (0.421) (0.885) (0.885)

EBIT (0.345) 0.361 1.573 0.909 2.482 1.267 2.615 3.882 8.038

Net Interest (0.094) 0.006 (0.004) 0.087 0.083 0.163 0.204 0.368 0.376

NPBT (0.467) 0.369 1.569 0.996 2.565 1.431 2.819 4.250 8.414

Tax 0.028 0.051 0.049 (0.120) (0.071) 0.110 (0.110) - (1.851)

NPAT (0.439) 0.420 1.618 0.876 2.494 1.540 2.709 4.250 6.563

Growth na na na 71.93% 493.99% (4.82%) 209.25% 70.36% 54.44%



Cash Flow Analysis

Figure 17: MBE Cash Flow


Key points MBE generated an inconsistent level of cash flows over FY12 and FY13 as the business was in its infancy and the company experienced relatively large fluctuations in working capital balances, although this appears to have normalised in recent times and cash flow generation has improved. Historically, the capital requirements of the business have been very low, however we note a material increase in capitalised software development costs in FY14 as MBE invested in modernising its technology and expanding in to international markets. We expect that 1H15 intangible and capex spend will be at a similar level in 2H15, although anticipate lower levels of spending in both areas over the long term, driving higher free cash flow generation.

FY12 FY13 1H14 2H14 FY14 1H15 2H15 FY15 FY16

EBITDA 0.323 0.802 1.755 1.200 2.955 1.731 3.035 4.767 8.923

Tax - - - - - - - (1.851)

Interest 0.003 0.027 (0.008) 0.101 0.093 0.163 0.204 0.368 0.376

Working Capital 0.471 (2.774) (0.309) 0.643 0.333 (2.158) 0.976 (1.182) (1.057)

Other (0.027) (2.295) (0.074) 0.243 0.169 (0.817) 0.817 - -

Operating Cash Flow 0.299 (1.466) 1.672 1.544 3.217 1.078 2.874 3.953 6.391

PPE (0.018) (0.017) (0.045) (0.492) (0.537) (0.189) (0.189) (0.378) (0.410)

Capex % revenue 0.16% 0.14% 0.47% 5.10% 2.80% 1.34% 1.14% 1.23% 1.00%

Intangibles (0.333) (0.289) (0.739) (1.251) (1.990) (0.607) (0.593) (1.200) (0.700)

Intagible capex % revenue - - - - - - -

Divestments 0.000 0.263 - - - - - - -

Acquisitions - - - - - (2.200) - (2.200) -

Other - - - - - - - - -

Investing Cash Flow (0.351) (0.043) (0.784) (1.743) (2.526) (2.996) (0.782) (3.778) (1.110)

Issues of Shares / options 0.983 1.000 0.311 11.104 11.415 0.072 - 0.072 -

Proceeds from borrowings 0.319 - (0.004) (0.004) 0.030 - 0.030 -

Repayment of Borrwings (0.300) (0.392) - - - - - - -

Net lease payments - - - - - - - -

Other - - - - - - - -

Dividends - - - - - - - -

Financing Cash Flow 1.002 0.608 0.311 11.100 11.411 0.102 - 0.102 -

Net Cash Flow 0.950 (0.902) 1.200 10.901 12.102 (1.815) 2.092 0.277 5.281

Cash at end of prior Period 0.108 1.058 0.156 1.356 0.156 12.258 10.443 12.258 12.535

Cash at End of Period 1.058 0.156 1.356 12.258 12.258 10.443 12.535 12.535 17.816



Balance Sheet Analysis

Figure 18: MBE Group Balance Sheet

Source: Company reports, TC estimates

Key points MBE boasts a strong balance sheet, with $10.4m in cash and no debt at the end of 1H15, following a $11.4m capital raising in March 2014. We believe that this strong cash position will be bolstered in the coming periods by increasing operating cash flows and provide MBE with considerable flexibility to pursue additional growth opportunities and/or commence the payment of dividends in the near term. We note that MBE has $7.5m of goodwill and $4.5m in deferred consideration relating to acquisition made during FY14.

FY12 FY13 1H14 2H14 FY14 1H15 FY15 FY16

Current Assets

Cash 1.057 0.156 1.356 12.258 12.258 10.443 12.535 12.535 17.918

Receivables 1.605 3.480 4.014 3.763 3.763 6.985 6.022 6.022 8.041

Days receivable 51.40 103.86 153.6 71.61 181.18 71.61 71.61

Inventories - - - - -

Days inventories na na na - -

Other 0.266 0.383 0.346 0.234 0.234 0.290 0.290 0.290 0.290

Total Current Assets 2.928 4.019 5.716 16.255 16.255 17.718 18.846 18.846 26.249

Non Current Assets

Receivables - 0.038 0.038 0.253 0.253 0.255 0.255 0.255 0.255

PPE 0.057 0.029 0.061 0.093 0.093 0.177 0.426 0.426 0.688

Deferred Tax Assets 0.370 0.213 0.262 0.207 0.207 0.322 0.322 0.322 0.322

Intangible 1.307 0.429 1.102 2.317 2.317 2.506 2.677 2.677 2.537

Goodwill 7.448 7.448 7.448 7.448

Other 0.044 0.006 0.005 0.006 0.006 0.006 0.006 0.006 0.006

Total NCA 1.777 0.715 1.468 2.877 2.877 10.715 11.134 11.134 11.257

Total Assets 4.706 4.734 7.184 19.132 19.132 28.433 29.980 29.980 37.506

Current Liabilities

Trade Payables 2.076 1.177 1.402 1.794 1.794 2.858 2.870 2.870 3.833

Days payable 66.481 35.121 53.661 34.132 74.133 34.132 34.132

Borrowings 0.397 0.004 - - - 0.030 0.030 0.030 0.030

Provisions 0.118 0.140 0.487 0.463 0.463 1.483 1.483 1.483 1.483

Other - - - - - 3.079 3.079 3.079 3.079

Total Current Liabilities 2.591 1.321 1.890 2.257 2.257 7.451 7.463 7.463 8.425

Non-Current Liabilities

Borrowings - - - - - - - -

Provisions / other - 0.040 - 0.043 0.043 1.467 1.467 1.467 1.467

Total Non-Current Liabilities - 0.040 - 0.043 0.043 1.467 1.467 1.467 1.467

Total Liabilities 2.591 1.360 1.890 2.300 2.300 8.917 8.929 8.929 9.892

Net Assets 2.115 3.374 5.294 16.831 16.831 19.515 21.051 21.051 27.614

Equity

Issued Capital 18.157 19.157 19.561 30.572 30.572 31.644 30.644 30.644 30.644

Retained Profits/Losses (16.808) (16.419) (14.800) (13.924) (13.924) (12.384) (9.675) (9.675) (3.112)

General Reserve 0.767 0.636 0.533 0.184 0.184 0.255 0.255 0.255 0.255

Total Equity 2.116 3.374 5.294 16.832 16.832 19.515 21.224 21.224 27.787



Management Profile Drew Kelton Independent Non-Executive Chairman Mr Kelton joined the Board of Mobile Embrace on 1 July 2010. He was recently Vice-president of T-Mobile in the United States and was formally President Enterprise Services at Bharti Airtel, India’s largest mobile phone operator and one of Asia’s leading integrated telecom service providers and a member of Bharti’s management board. Prior to joining Bharti Airtel, Mr Kelton spent eight years as Managing Director of Telstra Corporation’s International business unit where he was responsible for driving business growth in Telstra’s offshore operations and establishing a multinational customer division to oversee Telstra’s biggest global customers. Mr Kelton has over 30 years experience in telecommunications and IT solutions and has worked in Europe, Australia, Asia and the US. He holds a Bachelor of Science in Electrical and Electronic Engineering (Hons) from Glasgow’s Paisley College of Technology. In addition, he is a Chartered Engineer and Member of the Institution of Engineering and Technology. Interest in Shares and Options: 150,000 Shares and 3,000,000 options. Christopher Thorpe - CEO CEO and director of the company since May 2001, Mr Thorpe provides his expertise in the global mobile and telecommunications industry, with over 18 years experience gained in the United States, Europe and Australia. The combination of this experience with a financial background provides him with a strong understanding of the industry, its issues and trends, enabling the ability to commercialise and deploy successful business strategies. Mr Thorpe has been at the forefront of the mobile entertainment and telecommunications industry leading with a number of key innovations. His work has been acknowledged through the receipt of numerous business awards for these milestone achievements and contributions to the telecommunications industry. As CEO, Mr Thorpe provides leadership, insight, expertise, understanding along with a global network of leading industry associates and contacts. His vision and drive provide the company with opportunities to capitalise on its position as Australia’s leading mobile services provider. Interest in Shares and Options: 22,176,639 ordinary shares and 3,000,000 options. Gavin Whyte - Independent Non-Executive Director A director of the company since December 2005, Mr Whyte brings a wealth of global experience in the mobile entertainment media industry to the company. Gavin is an Advisor to adQuota International which is a leading mobile ad network in Scandinavia. adQuota are a premium ad network specializing in rich media formats and targeting. In addition to advising the Board, he has been leading the company’s M&A activities in Europe. He is the Founder of Rubberduck Consulting which is a new media consulting firm specializing in mobile gaming, marketing and entertainment services. Gavin was the Co-Founder and CEO of Touch Mobile Limited. Touch was a mobile start-up specialising in skill gaming, lottery games and mobile marketing. Touch was sold in April 2011 to a fast growing mobile operator. He was previously Chief Operating Officer of NetPlay TV plc. NetPlayTV is the UK's largest interactive TV gaming company, which includes brands such as SuperCasino.com, ChallengeJackpot.com, Play Monday and Big Box Bingo. Prior to this Gavin was Managing Director of Rubberduck Media Lab (RDML) which is a leading supplier of TV to mobile streaming solutions in the UK and Scandinavia. RDML was sold to Aspiro in Sweden in September 2006. Interest in Shares and Options: 395,000 ordinary shares.



David Haines Independent Non-executive Director A director of the company since May 2001. Mr Haines holds a Bachelor of Education degree and was Secretary to the Standing Committee of Commonwealth, State and Territory Ministers with Censorship Responsibilities (1988 to 1994), Deputy Chief Censor, Australian Film Censorship Board (1986 to 1994) and Member of the Australian Film Censorship Board (1981-1994). Interest in Shares and Options 325,000 ordinary shares. Simon Allison - CFO Company Secretary and CFO of the company since the 1st August 2012. A strong background in global telecommunications and technology sectors and a strong track record of growth with over 25 years in various Directorial and Finance roles in the UK, Asia, New Zealand and Australia. Prior to joining MBE Mr Allison was the CEO of Business Services for Leading Edge Group Limited and oversaw the Groups Global Telecommunications, Technology businesses, and the Financial operations for the Group internationally. Interest in Shares and Options: 3,000,000 options. Justin Clyne – Company Secretary Justin Clyne was admitted as a Solicitor of the Supreme Court of New South Wales and High Court of Australia in 1996 before gaining admission as a Barrister in 1998. He had 15 years of experience in the legal profession acting for a number of the country's largest corporations, initially in the areas of corporate and commercial law before dedicating himself full-time to the provision of corporate advisory and company secretarial services. Justin is a director and/or secretary of a number of public listed and unlisted companies. He has significant experience and knowledge in international law, the Corporations Act, the ASX Listing Rules and corporate regulatory requirements generally. Justin holds a Master of Laws in International Law from the University of New South Wales and is a qualified Chartered Company Secretary. Interest in Shares and Options: Nil.



Mobile Embrace - Summary of Forecasts MBE $0.16

PROFIT & LOSS SUMMARY (A$ m) BALANCE SHEET SUMMARY

Pe riod FY14 A FY15 E FY16 E Pe riod FY14 A FY15 E FY16 E

Tota l Re ve nue 19 .2 3 0 .7 4 1.0 Cash 12.3 12.5 17.9

Growth (pcp) 57% 60% 34% Receivables 3.8 6.0 8.0

EBITDA 3 .0 4 .8 8 .9 Other 0.2 0.3 0.3

D&A (0.5) (0.9) (0.9) Total Current Assets 16.3 18.8 26.2

EBIT 2 .5 3 .9 8 .0 Property Plant & Equip 0.1 0.4 0.7

Net Interest 0.1 0.4 0.4 Intangibles 2.3 10.1 10.0

Pre- Tax Profit 2.6 4.2 8.4 Other 0.5 0.6 0.6

Tax Expense (0.1) 0.0 (1.9) Total Non- Current Assets 2.9 11.1 11.3

NPAT 2 .5 4 .2 6 .6 TOTAL ASSETS 19 .1 3 0 .0 3 7 .5

Growth (pcp) 494% 70% 54% Accounts Payable 1.8 2.9 3.8

Abnormals 0.0 0.0 0.0 Borrowings 0.0 0.0 0.0

Reported Profit 2.5 4.2 6.6 Provisions 0.5 1.5 1.5

Tax Liabilities 0.0 0.0 0.0

PER SHARE DATA Other 0.0 0.0 0.0

Pe riod FY14 A FY15 E FY16 E Total Current Liab 2.3 4.4 5.3

EPS (c ) 0 .7 8 1.12 1.7 4 Borrowings 0.0 0.0 0.0

Growth (pcp) 411% 44% 54% Other 0.0 1.5 1.5

Dividend (c) 0.0 0.0 0.0 Total Non- Current Liab 0.0 1.5 1.5

Franking 100% 100% 100% TOTAL LIABILITIES 2 .3 5 .8 6 .8

TOTAL EQUITY 16 .8 2 4 .1 3 0 .7

KEY RATIOS

Pe riod FY14 A FY15 E FY16 E

EBITDA Margin (%) 15.4% 15.5% 21.8%

EBIT Margin (%) 12.9% 12.6% 19.6% CASH FLOW SUMMARY

Debtor Days 72 72 72 Pe riod FY14 A FY15 E FY16 E

EBIT Interest cover (x) na na na EBITDA 3 .0 4 .8 8 .9

Current ratio (x) 7.2 2.5 3.1 Tax 0.0 0.0 (1.9)

Net Debt : Equity (%) na na na Interest 0.1 0.4 0.4

ROE (%) 15% 20% 24% Working Capital 0.3 (1.2) (1.1)

Dividend Payout Ratio na na na Other 0.2 0.0 0.0

Ope ra ting Ca sh Flow 3 .2 4 .0 6 .4

Va lua tion Capex (2.5) (1.6) (1.0)

Pe riod FY14 A FY15 E FY16 E Fre e Ca sh Flow 0 .7 2 .4 5 .4

PE Ra tio (x) 2 0 .5 14 .2 9 .2 Issues of Shares 11.4 0.1 0.0

Divide nd Y ie ld (%) na na na Net Borrowings (0.0) 0.0 0.0

FCF Yield (%) 1.2% 3.9% 8.9% Acquisition related 0.0 (2.2) 0.0

EV/EBITDA (x) 16 .3 10 .1 5 .4 Dividends 0.0 0.0 0.0

EV/EBIT (x) 19.4 12.4 6.0 Net cash Flow 12 .1 0 .3 5 .4



Disclaimer

Disclaimer

The following Warning, Disclaimer and Disclosure relate to all material presented in this document and should be read before making any investment decision.

Warning (General Advice Only): Past performance is not a reliable indicator of future performance. This report is a private communication to clients and intending clients and is not intended for public circulation or publication or for the use of any third party, without the approval of Taylor Collison Limited ABN 53 008 172 450 ("Taylor Collison"), an Australian Financial Services Licensee and Participant of the ASX Group. While the report is based on information from sources that Taylor Collison considers reliable, its accuracy and completeness cannot be guaranteed. This report does not take into account specific investment needs or other considerations, which may be pertinent to individual investors, and for this reason clients should contact Taylor Collison to discuss their individual needs before acting on this report. Those acting upon such information and recommendations without contacting one of our advisors do so entirely at their own risk. This report may contain “forward-looking statements". The words "expect", "should", "could", "may", "predict", "plan" and other similar expressions are intended to identify forward-looking statements. Indications of and guidance on, future earnings and financial position and performance are also forwardyh looking statements. Forward-looking statements, opinions and estimates provided in this report are based on assumptions and contingencies which are subject to change without notice, as are statements about market and industry trends, which are based on interpretations of current market conditions. Any opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice and Taylor Collison assumes no obligation to update this document after it has been issued. Except for any liability which by law cannot be excluded, Taylor Collison, its directors, employees and agents disclaim all liability (whether in negligence or otherwise) for any error, inaccuracy in, or omission from the information contained in this document or any loss or damage suffered by the recipient or any other person directly or indirectlvgy through relying upon the information. TC Corporate Pty Ltd ABN 31 075 963 352 (“TC Corporate”) is a wholly owned subsidiary of Taylor Collison Limited. Disclosure: The preparation of this report was funded by ASX in accordance with the ASX Equity Research Scheme. This report was prepared by Taylor Collison and not by ASX. ASX does not provide financial product advice. The views expressed in this report do not necessarily reflect the views of ASX. No responsibility or liability is accepted by ASX in relation to this report. Analyst remuneration is not linked to the rating outcome. Taylor Collison may solicit business from any company mentioned in this report. For the securities discussed in this report, Taylor Collison may make a market and may sell or buy on a principal basis. Taylor Collison, or any individuals preparing this report, may at any time have a position in any securities or options of any of the issuers in this report and holdings may change during the life of this document.

Analyst Certification: The Analyst(s) certify that the views expressed in this document accurately reflect their personal, professional opinion about the financial product(s) to which this document refers.

Date Prepared: March 2015

Analyst: Marcus Hamilton

Release Authorised by: Mark Pittman

11 march 2015 mobile embrace (mbe) · pdf file11 march 2015 mobile embrace (mbe) ... - mbe...

Documents